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Exercise 5-12 Computing sales to achieve target income LO C2
Blanchard Company manufactures a single product that sells for $250 per unit and whose total variable costs are $200 per unit.
The company’s annual fixed costs are $770,000. Management targets an annual pretax income of $1,250,000.
Assume that fixed costs remain at $770,000.
 

   
Exercise 5-11 Income reporting and break-even analysis LO P2
Blanchard Company manufactures a single product that sells for $120 per unit and whose total variable costs are $84 per unit.
The company’s annual fixed costs are $529,200.
 
(1) Prepare a contribution margin income statement for Blanchard Company at the break-even point.
 
(2) Assume the company’s fixed costs increase by $132,000. What amount of sales (in dollars) is needed to break even?
 

   
Exercise 5-21 Predicting unit and dollar sales LO C2
Nombre Company management predicts $1,320,000 of variable costs, $1,686,000 of fixed costs, and a pretax income of $294,000 in the next period.
Management also predicts that the contribution margin per unit will be $33.
 

   
Problem 5-4A Break-even analysis; income targeting and forecasting LO C2, P2, A1
[The following information applies to the questions displayed below.]


Astro Co. sold 20,800 units of its only product and incurred a $56,672 loss (ignoring taxes) for the current year as shown here.
During a planning session for year 2018’s activities, the production manager notes that variable costs can be reduced 50% by installing a
machine that automates several operations. To obtain these savings, the company must increase its annual fixed costs by $158,000.
The maximum output capacity of the company is 40,000 units per year.
 

ASTRO COMPANY Contribution Margin Income Statement For Year Ended December 31, 2017
Sales		$	796,640
Variable costs			637,312
Contribution margin			159,328
Fixed costs			216,000
Net loss		$	(56,672	)

 
Problem 5-4A Part 1
Required:
Compute the break-even point in dollar sales for year 2017.
(Round your answers to 2 decimal places.)
 

 
2 2. Compute the predicted break-even point in dollar sales for year 2018 assuming the machine is installed and there is no change in the unit selling price.
(Round your answers to 2 decimal places.)
 

 
Prepare a forecasted contribution margin income statement for 2018 that shows the expected results with the machine installed.
Assume that the unit selling price and the number of units sold will not change, and no income taxes will be due.
(Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

 
Compute the sales level required in both dollars and units to earn $280,000 of target pretax income in 2018 with the
machine installed and no change in unit sales price.
(Do not round intermediate calculations. Round your answers to 2 decimal places. Round "Contribution margin ratio"
to nearest whole percentage)

Prepare a forecasted contribution margin income statement that shows the results at the sales level computed in part 4.
Assume no income taxes will be due.
(Do not round intermediate calculations. Round "per unit answers" to 2 decimal places.)

 
Assume the company is considering investing in a new machine that will increase its fixed costs by $43,000 per year and decrease its variable costs by $8 per unit. Prepare a forecasted contribution margin income statement for 2020 assuming the company purchases this machine.

Q10. Hudson Co. reports the contribution margin income statement for 2019.

HUDSON CO.
Contribution Margin Income Statement
For Year Ended December 31, 2019
Sales (10,100 units at $300 each)	$	3,030,000
Variable costs (10,100 units at $240 each)		2,424,000
Contribution margin		606,000
Fixed costs		468,000
Pretax income	$	138,000

If the company raises its selling price to $320 per unit.

1. Compute Hudson Co.’s contribution margin per unit.
2. Compute Hudson Co.’s contribution margin ratio.
3. Compute Hudson Co.’s break-even point in units.
4. Compute Hudson Co.’s break-even point in sales dollars.

Q11. Hudson Co. reports the contribution margin income statement for 2019.

HUDSON CO.
Contribution Margin Income Statement
For Year Ended December 31, 2019
Sales (10,100 units at $300 each)	$	3,030,000
Variable costs (10,100 units at $240 each)		2,424,000
Contribution margin		606,000
Fixed costs		468,000
Pretax income	$	138,000

The marketing manager believes that increasing advertising costs by $101,000 in 2020 will increase the company’s sales volume to 11,500 units. Prepare a forecasted contribution margin income statement for 2020 assuming the company incurs the additional advertising costs.

Q12. Nombre Company management predicts $720,000 of variable costs, $866,000 of fixed costs, and a pretax income of $214,000 in the next period. Management also predicts that the contribution margin per unit will be $15.

Q13. Handy Home sells windows and doors in the ratio of 8:2 (windows:doors). The selling price of each window is $114 and of each door is $264. The variable cost of a window is $69.50 and of a door is $182.00. Fixed costs are $416,000. (Enter your “per unit” values in two decimal places.)

Q14. Company A is a manufacturer with sales of $3,800,000 and a 50% contribution margin. Its fixed costs equal $1,320,000. Company B is a consulting firm with service revenues of $3,700,000 and a 25% contribution margin. Its fixed costs equal $370,000.
Compute the degree of operating leverage (DOL) for each company. Which company benefits more from a 20% increase in sales.

Q15. Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope.
1. Estimate Product XT’s break-even point in terms of sales units and sales dollars. (1 unit = 100 yards) (Do not round intermediate calculations.)

Q16. Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 550,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope.
2. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.

Q17. Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 44,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	774,400				$	774,400
Variable costs			464,640					154,880
Contribution margin			309,760					619,520
Fixed costs			187,760					497,520
Income before taxes			122,000					122,000
Income taxes (32% rate)			39,040					39,040
Net income		$	82,960				$	82,960

Required:
1. Compute the break-even point in dollar sales for each product. (Enter CM ratio as percentage rounded to 2 decimal places.)

Q18. Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 44,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	774,400				$	774,400
Variable costs			464,640					154,880
Contribution margin			309,760					619,520
Fixed costs			187,760					497,520
Income before taxes			122,000					122,000
Income taxes (32% rate)			39,040					39,040
Net income		$	82,960				$	82,960

2. Assume that the company expects sales of each product to decline to 27,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax benefit. (Round “per unit” answers to 2 decimal places. Enter losses and tax benefits, if any, as negative values.)

Q19. Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 44,000 units of each product. Sales and costs for each product follow.

	Product T					Product O
Sales		$	774,400				$	774,400
Variable costs			464,640					154,880
Contribution margin			309,760					619,520
Fixed costs			187,760					497,520
Income before taxes			122,000					122,000
Income taxes (32% rate)			39,040					39,040
Net income		$	82,960				$	82,960

3. Assume that the company expects sales of each product to increase to 58,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate). (Round “per unit” answers to 2 decimal places.)


 

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